Intercompany advances of USD 0.8 billion</li></ul>26.0%<br />53.2%<br />20.8%<br />47.4%<br />52.6%<br />PLDT<br />Digitel<br />2<br />After<br />First Pacific<br />NTT<br />JG Summit Holdings <br />Others <br />25.1%<br />18.0%<br />10.1%<br />46.8%<br />PLDT + Digitel<br />“Transaction valued at 15x EV/EBITDA”<br /><ul><li>Purchase consideration implies feasible merger synergies of ~USD 1.1 billion – going way beyond cost synergies</li></ul>1 Above shareholding outcome assumes all Digitel minorities opt for share consideration and JGS/First Summit exercise put-call option<br />2 Convertible to 18.6 billion Digitel shares by Jun 2011<br />SOURCE: JP Morgan<br />
The Market Implication- Market Power Concentration: Revenue and SIM share- The Spectrum Play: Scarcity of Resources<br />
Market Power concentration resulting from the Merger<br />How competition authorities would look at it!<br />No legal constraint in the Philippines<br />HHI index1<br />Textbook regulatory considerations<br /><ul><li>The Philippines does not have a national competition authority nor specific rules governing mergers that are potentially anti-competitive
The NTC regulates the industry and responsible for healthy competition and protect consumers from monopoly, or quasi-monopoly powers.
However, there are no specific rules governing significant market power (SMP) in the industry
In December 2005, the NTC proposed rules on restraining SMP but were never adopted because of PLDT’s opposition
Any market with HHI >1,800 is considered highly concentrated
Any increase beyond 100 HHI point would then be considered anti-competitive</li></ul>+1,813<br />+958<br />1,800<br />Before merger<br />After merger<br />Before merger<br />After merger<br />Merger will be hard to prevent in the current Philippine legislation<br />Subscribers<br />Service revenues<br />1 Herfindahl–Hirschman Index (HHI) as a measure of market concentration<br />SOURCE: McKinsey<br />5<br />
After the merger, Smart/Sun would have ~66% revenue market share in mobile market<br />Mobile revenues and revenue market share <br />Mobile subscribers and subscriber market share <br />Revenues<br />PhP billions<br />Subscribers<br />Millions<br />-0.3%<br />15.8%<br />7.9%<br />150<br />88<br />88<br />149<br />149<br />24.6%<br />129<br />66<br />(54%)<br />(56%)<br />(52%)<br />(66%)<br />(71%)<br />(57%)<br />(54%)<br />42<br />(5%)<br />(17%1)<br />(8%1)<br />(2%)<br />(57%)<br />(9%)<br />(6%)<br />(35%)<br />(38%)<br />(34%)<br />(31%)<br />(29%)<br />(29%)<br />(38%)<br />(37%)<br />2006<br />2010<br />2010 (post-merger)<br />2008<br />2010 (post-merger)<br />2010<br />2008<br />2006<br />1 Based on extrapolating 2010 Q1-Q3 results<br />SOURCE: Merrill Lynch; Digitel Annual Report<br />
In many markets, the regulator required the return of spectrum when market concentration increased due to mergers<br />Spectrum to be surrendered to competition<br />MHz<br />Threshold for concerns of competition authorities<br />Smart / Sun merger changes the industry concentration by a 0.18 HHI points and will justify a major disposal of spectrum<br />Change in industry concentration(HHI change)<br />1 Herfindahl–Hirschman Index (HHI) as a measure of market concentration<br />SOURCE: ML Wireless Matrix, WCIS<br />
Philippines has one of the highest concentrations in Asia<br />Industry concentration for Telecom industry of countries in Asia<br />HHI, Dec 2010<br />Philippines (after merger)<br />China<br />Philippines(before merger)<br />Korea<br />Japan<br />Singapore<br />Malaysia<br />Thailand<br />Australia<br />Indonesia<br />Bangladesh<br />Pakistan<br />India<br />8<br />Ø 0.35<br />SOURCE: Merrill Lynch<br />
Spectrum is the service delivery platform for telecommunications.<br /><ul><li>Dictionary definition: A frequency of electromagnetic radiation in the range at which radio signals are transmitted, ranging from approximately 3 kilohertz to 300 gigahertz.
Contextual definition: Akin to real estate or commercial space for telecommunications, spectrum represents the means or tools by which a public telecommunications entity (PTE) delivers services to a finite number of subscribers. More/less “real estate” serves more/less subscribers; more/less “commercial space” means more/less services deliverable.</li></li></ul><li>It is a scarce public resource enshrined in law.<br />The radio frequency spectrum is a scarce public resource that shall be administered in the public interest and in accordance with international agreements and conventions to which the Philippines is a party and granted to the best qualified. The government shall allocate the spectrum to service providers who will use it efficiently and effectively to meet public demand for telecommunications service and may avail of new cost effective technologies in the use of methods for its utilization. – Republic Act 7925, Article II, Section 4(c)<br />The radio frequency allocation and assignment shall be subject to periodic review. The use thereof shall be subject to reasonable spectrum user fees. Where demand for specific frequencies exceed availability, the Commission shall hold open tenders for the same and ensure wider access to this limited resource. – Republic Act 7925, Article V, Section 15<br />
The consolidation of PLDT/Smart and Digitel/Sun will result in an lopsided imbalance of spectrum allocation in their favor.<br />155 MHz vs 55 MHz <br />3.5 : 1 Ratio<br />On 3G alone, the ratio is 1:4.5 in favor of PLDT/Digitel<br />
All other usable spectrum resources considered, including bands in the 3400 MHz and 5400 MHz ranges, the gap widens further.<br />Globe serves 26.5M subscribers with only 69 MHz while Smart + Sun shall effectively serve 60M subscribers with 372MHz.<br />Therefore, Globe serves 384K subscribers with every 1 MHz of spectrum whereas Smart + Sun will only address 161K subscribers with every 1 MHz of spectrum.<br />5.4 : 1 Ratio<br />Theoretically, Smart + Sun should NOT be assigned more than 224 MHz of spectrum (vs 372 MHz post-consolidation) to cater to 60M subscribers.<br />
In the end, however, the ratio of spectrum to subscribers is hardly as important as the equitable distribution of a scarce public resource in the name of fair competition.<br /><ul><li>While there are nuances to the “efficient” utilization of spectrum –
Subscriber usage profiles (e.g. data-savvy users tend to take up more bandwidth);
Richer services (e.g. video streaming requires more bandwidth);
Service quality levels ( e.g. “budget” quality calls possible with less bandwidth) –
Between two players seteris paribus, it costs less to serve the same number of subscribers with more spectrum from an investment-to-capacity perspective.
Ultimately, using the real estate or commercial space analogy, the player with more land does not have to build as tall a structure to serve the same number of people as the player with less land (and is compelled to go “high rise” at more cost).
With more spectrum simply, PLDT-Digitel will be able to serve more customers and deliver more services than Globe.</li></li></ul><li>There are a number of interventions taken by regulators worldwide to ensure a level playing field among competitors<br />Spectrum disposal <br />Asymmetrical interconnection<br />Exclusionary practices<br /><ul><li>Spectrum allocation for 3G/4G mobile data services will result in significant unit cost advantage for merged Smart/Sun1
At in-country mergers, most regulators have required merging companies to return or sell parts of their 2G/3G spectrum
Consistent with international examples, Smart/Sun should be required to surrender/sell a part of its spectrum (i.e., 2x10 MHz) to Globe to minimize the anti-competitive effect of the merger
The merger significantly extends the calling circle of Smart and the attractiveness of its on-net offers. e.g., unlimited, to customers
This can be countered by asymmetric interconnection charges in which Globe is granted a discounted interconnection charge (i.e., by 1 PHP per minute) to increase the commercial viability of competitive off-net offers in Globe
Many regulators have strict rules to ensure fixed mobile bundling does not lead to unfair competitive advantages, e.g., in South Korea ensuring that bundles are replicable and In France and Spain where quadruple play bundling is banned
Furthermore, any exclusivity deals limited to the Philippine market for, e.g., content, distribution channels, will restrict fair competition</li></ul>1 Significant gap in competitiveness already prevalent prior to merger with, e.g., Smart owning 2x25 MHz in 2,100 MHz band vs. Globe’s 2x10 Mhz <br />
Many in-country consolidations were asked to surrender spectrum in order to gain regulatory approval (1/3)<br />National consolidation deals<br />Acquirer<br />Country<br />Target<br />Date<br />NRAs conditions<br />UK<br />Orange<br />T-Mobile<br />2009<br /><ul><li>The European Commission cleared the proposed merger conditional on divestiture of a quarter of the combined spectrum of the merging parties in the 1800 MHz band and amendment of an existing network sharing agreement with Hutchison 3G UK to ensure that there remain sufficient competition
The TRAI requested Idea to surrender its UASL licences in overlapping regions (e.g. the Punjab and Karnataka circles, where Spice also had operations).</li></ul>Idea Cellular<br />Spice Com<br />2008<br />India<br /><ul><li>Anatel asked Oi to return TeleNorte Cellular’s 15MHz in the 850MHz band immediately, with the remaining frequencies to be returned in the next 18 months</li></ul>Brazil<br />Oi<br />Tele Norte Celular<br />2008<br /><ul><li>Merger approved on the condition that the combined company divest radio spectrum assets in 100 markets in 22 states where the two companies overlap. </li></ul>USA<br />Verizon<br />Alltel<br />2008<br />SOURCE: Press; NRAs<br />
Many in-country consolidations were asked to surrender spectrum in order to gain regulatory approval (2/3)<br />National consolidation deals<br />Acquirer<br />Country<br />Target<br />Date<br />NRAs conditions<br /><ul><li>The regulator approved the merger conditional to the return of 35 MHz spectrum to the government within 2 years. In Argentina, no operator is allowed to hold over 50MHz. </li></ul>Telefónica<br />BellSouth<br />2005<br />Argentina<br />Chile<br />Telefónica<br />BellSouth<br />2005<br /><ul><li>In Chile Telefonica was required to sell 25MHz of its spectrum in the 800MHz band within 18 months. </li></ul>Peru<br />Telefónica<br />BellSouth<br />2005<br /><ul><li>The regulator asked TEM Peru to hand back one of its 25MHz licences, and was given 2 years to switch subscribers over to the 1800MHz band
Danish regulator required Telia to return one set of GSM 900/1800 by end of 2005. it was also required and to return or sell one of the two UMTS licenses the merged entities have no later than 31 January 2005</li></ul>Denmark<br />Telia<br />Orange<br />2004<br />SOURCE: Press; NRAs<br />
Many in-country consolidations were asked to surrender spectrum in order to gain regulatory approval (3/3)<br />National consolidation deals<br />Country<br />Acquirer<br />Target<br />Date<br />NRAs conditions<br /><ul><li>AT&T is reportedly prepared to pay a $3 billion breakup fee and shed a significant chunk of T-Mobile spectrum</li></ul>USA<br />AT&T<br />T-Mobile<br />2011 (ongoing)<br /><ul><li>NRA approved the deal despite the merger leading to a player with 58% of GSM 900 and over 50% of 1800 frequencies.
VimpelCom subsequently announced plan to volun-tary refarming its spectrum amongst domestic mobile operators and relinquish excess spectrum. This move was clearly to appease opposition from smaller players (e.g. Astelit) who oppose the deal</li></ul>Beeline/Vimpelcom<br />2010<br />Kyivstar<br />Ukraine<br />SOURCE: Press; NRAs<br />
What will this merger bring to the Consumer?<br />
What’s in it for the consumer?<br />Monopoly is back<br />95% of broadband is theirs!<br />Pricing dictatorship<br />Full interconnection was never a reality, even after 21 years!<br />Lack of IP peering, affecting internet services<br />Product and Service Innovation<br />Could we be happier with just analogue? <br />
We need a level playing field for free market competition to work!<br />Consumers should be given the choice!<br />